Chinese Shadow Banks Appeal for Government Rescue

Published By : 18 Aug 2015 |Published By : QYRESEARCH

China’s shadow banking system has again come under the spotlight with the collapse of a state-owned credit guarantee company. The risks posed by bad debts have increased with the recent slump in the Chinese economy. Concerns are mounting particularly over rising defaults on loans from non-bank lenders which provide credit to risky borrowers at high interest rates.

Eleven of these shadow banks have asked the Chinese government for a bailout that would let the bankrupt company to backstop loans to the risky borrowers. These banks have written an open letter to a top Communist party official in Hebei province of Northern China. The banks have urged that if the guarantor cannot pay, it would lead to defaults on about 24 high-yielding wealth management products. The eleven shadow banks have sold 24 different wealth management products worth Rmb5.5 billion.

Analysts have pointed out that a series of bailouts in the recent times have led to irresponsible lending. This has fuelled the perception that the government would not tolerate default. The latest appeal for bailout by the shadow banks will compel the officials to opt for either imposing market discipline on investors or ensuring short-term financial stability. On a longer run, imposing market discipline on investors will improve the lending practices.

According to a well-known financial magazine Caixin, Hebei Financing Investment Guarantee Group has guaranteed loans worth US$7.8 billion from around 50 financial organizations. A majority of these are non-bank lenders, particularly trust companies, who lent to factories and property developers. Hebei Financing stopped paying out on all loan guarantees since January. The Group guaranteed loans underlying wealth management products that did not guarantee investors against losses. These products are usually distributed through state-owned banks. In the recent times, technical defaults on these high-yield products have led to angry protests by the investors. Bailouts have often shielded the investors against losses. Fear of reputational damage has led the trust companies to repay their investors using own capital or pressure the government for a rescue.